Bluetongue virus (BTV) is the cause of an insect-transmitted virus infection of ruminants that occurs throughout much of the world. Individual gene segments differ between field strains of BTV; thus, we hypothesized that key viral genes undergo genetic drift during alternating passage of BTV in its ruminant and insect hosts. To test this hypothesis, variation in the consensus sequence and quasispecies heterogeneity of the VP2 and NS3/NS3A genes of a plaque-purified strain of BTV serotype 10 was determined during alternating infection of vector Culicoides sonorensis and a sheep and calf. Consensus sequences were determined after reverse transcriptase-nested PCR amplification of viral RNA directly from ruminant blood and homogenized insects, and quasispecies heterogeneity was determined by the sequencing of clones derived from directly amplified viral RNA. Comparison of these sequences to those of the original BTV inoculum used to initiate the cycle of BTV infection demonstrated, for the first time, that individual BTV gene segments evolve independently of one another by genetic drift in a host-specific fashion, generating quasispecies populations in both ruminant and insect hosts. Furthermore, a unique viral variant was randomly ingested by C. sonorensis insects that fed on a sheep with low-titer viremia, thereby fixing a novel genotype by founder effect. Thus, we conclude that genetic drift and founder effect contribute to diversification of individual gene segments of field strains of BTV.